Trade war worries Philips as it banks on China growth

AMSTERDAM (Reuters) - Philips (PHG.AS) is worried about rising trade tensions between the United States and China, said the Dutch health-technology company that is banking on continuing Chinese demand for its high-end medical equipment.

A Philips logo is seen at Philips headquarters in Amsterdam, January 28, 2014. REUTERS/Toussaint Kluiters/United Photos/File Photo

Strong demand from Chinese hospitals for its ultrasound machines, medical scanners and other equipment helped Philips’ first-quarter results beat analyst expectations on Monday, but the simmering trade dispute between the United States and China could threaten future earnings.

“So far the effects are modest, but we are worried about the trade tensions,” Chief Executive Frans van Houten told Reuters in a telephone interview.

“We don’t expect any tariffs to be imposed on medical equipment, but we see indirect effects through the rising cost of commodities such as aluminum and steel. We can’t isolate ourselves from that, nor from the effects on economic confidence overall.”

“The (profit) beat is mainly driven by the Diagnostics & Treatment business,” said ING analyst Marc Zwartsenburg, referring to the division that makes hospital equipment. He also noted the 10 percent rise in new orders.

Growth in the diagnosis and treatment division was especially strong in China, where Philips achieved double-digit growth.

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“We expect to maintain this growth rate for the rest of the year,” Van Houten said. “All signals are positive and we have no reason to expect a slowdown.”

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There was also strong demand from U.S. hospitals, though the picture in Europe was less favorable as many hospitals continue to grapple with the effects on their budgets after years of austerity.

On the upside, this has led to a noticeable uptake in the long-term partnerships Philips offers to hospitals, Van Houten said.

In the first quarter the company sealed eight new contracts, in which the company offers new equipment and technological assistance for a fixed yearly rate, taking the total number to more than 100 worldwide.

Philips fared less well with its connected care and informatics business, with customers hesitant to invest heavily in what Philips ultimately sees as a major growth market, Van Houten said.

The division, which includes patient monitoring systems and software used by hospitals to gather and analyze data, will show better results in the months to come, the CEO said, and is still expected to hit the 4-6 percent sales growth target Philips has for all its divisions.

Overall, core profit in the first three months of the year rose 15 percent to 344 million euros ($422.1 million) on comparable sales growth of 5 percent.

Analysts in a Reuters poll had predicted adjusted earnings before interest, tax and amortization (EBITA) for the first quarter of 332 million euros on sales up 4.3 percent.

Reporting by Bart Meijer; Editing by Biju Dwarakanath and David Goodman